Failing to plan is planning to fail

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We have some optimism in markets this morning and that is leading hares and other risky assets higher. Whether the optimism is misplaced will have to remain to be seen but traders and investors are certainly more hopeful of an ECB plan to deal with bank liquidity and a plan to leverage the EFSF than they were 24hrs ago. Moves were fairly muted in currency markets yesterday but the euro has remained above the 1.15 level in GBPEUR while EURUSD is now above the 1.35 mark.

The latest theory to deal with the debt of the European periphery seems to be leveraging the European Financial Stability Fund’s EUR 440bn via the European Central Bank. This would increase the firepower to something like EUR 2 trillion but is set to meet a huge amount of resistance from the core countries including Germany. Jens Weidmann, head of the Bundesbank, said yesterday that using central bank’s resources to boost the E440 billion firepower of the European Financial Stability Facility was not appropriate to solve the European debt crisis. “It’s a recipe that doesn’t work in Europe,” and that asking the ECB to leverage the EFSF “completely blurs the lines between fiscal and monetary policy,” would “erode public confidence” in the monetary union and undermine governments’ commitments to fiscal consolidation”. So we’ll put him in the “No” column then.

There was more news from Europe with the ECB reportedly agreeing to discuss restarting purchases of covered bonds, the reintroduction of 12-month liquidity operations, as well as rate cuts at next week’s Governing Council meeting. This signals quite a shift in the mentality of the ECB; Recent noises from the Eurozone have shown that the ECB is starting to realize that inflation expectations are slipping in Europe and that a rate cut will be to the benefit of most.

As we have mentioned before the ECB are dangerous and obsessive anti-inflation paranoids and they have hurt more Europeans than they have helped. A similar mistake was made in 2008 and a 25bps rate increase in the main repo rate was quickly reversed as the Lehman’s situation catapulted world markets into a tailspin. With a banking and liquidity crisis being talked about once again we believe a rate cut is once again needed to protect the European financial system. In any case, at what cost is price stability when the banks are crumbling to the ground?

Rumours yesterday tended to suggested that people are now looking for a 50bps cut at the bank’s next meeting on October 6th.

In news from the UK, MPC member Ben Broadbent said he was reasonably close to voting for more quantitative easing at the Sept. meeting and does not believe it would take much more deterioration for him to make such a decision. This did not have too much affect on GBP however as the minutes from the Bank of England’s latest meeting suggested that a fair few of the MPC members were in a similar boat.

We have a busy day ahead as GfK will publish German consumer confidence for October, expected to come in marginally weaker at the lowest level since Oct’10. The US calendar brings S&P/Case-Schiller July house prices, the Richmond Fed’s September manufacturing PMI, and CB September consumer confidence. A slight increase in the consumer confidence measure is expected following the 14.7pt plunge recorded in August that took the index to the lowest level since Apr’09.

We also have debt auctions from Spain, Italy and the Netherlands.

Indicative Rates Sell Buy
GBPEUR 1.1492 1.1519
GBPUSD 1.5563 1.5588
EURUSD 1.3528 1.3549
GBPJPY 118.88 119.14
GBPAUD 1.5730 1.5758
GBPNZD 1.9753 1.9784
GBPCAD 1.5966 1.5996
NZDUSD 0.7865 0.7885
GBPZAR 12.36 12.41
USDZAR 7.9311 7.9800
GBPPLN 5.0384 5.0667
EURJPY 103.32 103.56

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